Technical indicators are mathematical tools that help Forex traders perform technical analysis on their favorite currency pairs. The basic premise of technical analysis is that history tends to repeat itself. Technical analysts believe that by analyzing past price action, they will be able to establish where future prices will find supply or demand, thus pick out good trading opportunities. To do this, they utilize technical indicators. There are two main types of technical indicators: leading and lagging indicators. Leading indicators deliver trading signals before a price movement has begun, while lagging indicators are essentially confirmation tools because they deliver signals after a new trend or reversal has occurred in the market.
There are numerous technical indicators available to traders on the MetaTrader 4 (MT4) platform, and they help traders decipher price elements, such as trend, momentum, volatility, volume and market cycles.
These are the most popular group of technical indicators because the open secret of the financial markets is that trading with the trend, is less risky and more profitable. Trend indicators help traders determine the direction of the dominant price trend, and they also ensure that traders find the best trading opportunities in trending markets.
Some of the common trend indicators among Forex traders include Moving Averages, Parabolic SAR and Ichimoku Kinko Hyo.
Momentum indicators are also known as oscillators, and they are technical indicators that help traders establish overbought or oversold conditions in the market. When a market is overbought, prices are considered high and unsustainable, with traders seeking opportunities to place Sell orders. On the other hand, in an oversold market, prices are considered cheap, with market participants seeking opportunities to place Buy orders in anticipation of an uptick in prices.
Some of the common momentum indicators include Stochastics, Relative Strength Index (RSI) and MACD.
In Forex, volatility is defined as the frequency and severity of price fluctuations in the market. High volatile currency pairs are characterized by big, choppy and erratic price movements. Additionally, volatile pairs will usually post the widest price ranges in any particular trading session. Volatility indicators attempt to depict this behavior, but it is worth pointing out that they do not denote price direction.
Determining volatility is very important for Forex traders. It not only helps in determining which markets to trade, but also the amount to stake. High volatile markets should be traded with lower investment amounts because of their erratic nature, while less volatile markets can be traded with higher stake amounts because of their more predictable nature.
Some of the most common volatility indicators include the Average Trade Range (ATR) and Bollinger Bands.
Another important group of technical indicators are Volume indicators. By showing the volume of trades behind any particular price movement in the market, volume indicators help traders verify whether such a move has conviction or lack thereof. Thus, they confirm trends or forecast reversals in the market. They can also help Forex traders avoid fake or false trading signals in the market.
Some of the most common volume indicators available to Forex traders in MT4 include Volumes, Accumulation/Distribution, Money Flow Index and Force Index.
Market Cycles Indicators
Market cycles indicators are a group of technical indicators mostly utilized by advanced traders. Unlike the other indicators that are purely mathematical, market cycles indicators also attempt to judge the collective sentiment in the market in terms of supply and demand. They also include another important price element - time. Prices in the Forex market usually move in cycles of boom and bust, forming tops and bottoms in the market. Market cycles indicators help traders anticipate where and when prices are likely to rise, peak, fall or bottom.
The most common market cycles indicators used by Forex traders include Elliot Waves, Fibonacci Time Zones and Gann Cycles.
Price movements in the Forex market may seem random and chaotic, but technical indicators help traders put all the price action into perspective. By understanding past and current price action, traders are able to predict future price behavior and to identify great entry and exit trade opportunities in the market.